Alion noteholders agree to extend refinancing support agreement

By Angela McDaniels

Tacoma, Wash., May 2 - Alion Science and Technology Corp. and the holders of a majority of its 10¼% senior notes due Feb. 1, 2015 amended their refinancing support agreement, according to an 8-K filing with the Securities and Exchange Commission.

The amendment extends the outside date required for closing the refinancing transactions contemplated by the agreement to July 31 from April 28.

As previously reported, the company plans to launch a tender and exchange offer for the notes. ASOF II Investments, LLC and Phoenix Investment Adviser LLC, the noteholders party to the refinancing support agreement, agreed to tender all of their notes in the offer and to elect the exchange option by the early tender deadline. They hold 65.7% of the notes.

The noteholders will also consent to proposed amendments to eliminate substantially all of the covenants and events of default in the note indenture and, if the company elects to make a tender offer for its 12% senior secured notes due 2014, to tender all of their 12% notes in that tender offer.

The refinancing support agreement is contingent upon the receipt of tenders for at least 95% of the outstanding 10¼% notes or a lesser percentage as determined by the supporting noteholders.

Exchange/tender offer changes

Under the amendment made to the refinancing support agreement, the cash interest rate for the new third-lien notes to be issued in the exchange offer will be reduced to 8% from 12% for the first 30 months following the closing and will step up to 10% for months 31 through 36 and to 12% for the remaining term of the notes.

The payment-in-kind interest rate on the third-lien notes will be 5.5% in year one, 6.5% in year two, 7.5% in months 25 through 30, 5.5% in months 31 through 36, 4.5% in months 37 through 48, 5.5% in months 49 through 60 and 6.5% in months 61 through 66.

The company said this change will reduce its cash interest expense by more than $9 million per year during the first 30 months.

In the tender/exchange offer, noteholders will have two options.

Under the first option, noteholders can tender all or a portion of the notes for cash in an amount equal to $600 per $1,000 principal amount of notes, subject to a $20 million cash tender cap, and an early tender payment of 1½% of the principal amount of the notes tendered by the early tender date. The company will also pay interest up to but excluding the settlement date.

Under the second option, noteholders can exchange all or a portion of the notes for new 5.5-year third-lien notes in a principal amount equal to the principal amount of existing notes exchanged; cash equal to unpaid interest up to but excluding the settlement date; if applicable, the early tender payment of 1½% of the principal amount of notes tendered by the early tender date; immediately exercisable warrants to purchase a share of 12½% of the company's outstanding common stock with an exercise price of $0.01 per share and warrants to purchase a share of 15% of the company's outstanding common stock.

Alion said one-third of the warrants to purchase 15% of its stock would be immediately exercisable on the settlement date of the tender/exchange offer, one-third would be exercisable after the first anniversary of the settlement date and one-third would be exercisable after the second anniversary of the settlement date.

The amendment changed the exercise price for the closing date warrants. Previously, the price was going to be $8.10. Now, it will be the lesser of (a) $8.10, (b) to the extent a valuation is delivered by the employee ownership, savings and investment plan trustee to the company prior to closing or relating to the period ended March 31, the value per share of the common stock as set forth in that valuation and (c) the value per share of the common stock as set forth in a valuation to be conducted within two months of the closing date.

The exercise price for the warrants exercisable after the first and second anniversaries will be based on the then current fair market value of the company's common stock under an employee ownership, savings and investment plan.

Additional notes offering

Noteholders who tender all of their notes and choose the exchange option by the early tender date will have the option to purchase, for $600 cash for each $1,000 principal amount of new third-lien notes and a proportionate amount of new warrants, additional new third-lien notes and the proportionate amount of new warrants in a registered offering.

The proceeds from this offering will be used solely to fund up to the first $10 million of the cash tender price.

ASOF has committed to purchase any new third-lien notes and a proportionate amount of new warrants that are not subscribed for in the cash tender offer funding under a private offering.

Other refinancing details

In addition to the exchange/tender offer, the refinancing agreement includes the following transactions:

• Replacing the company's existing $35 million revolving credit facility with a new $45 million super-priority revolving credit facility with no less than a five-year term;

• Entering into a new $300 million first-lien term loan facility with no less than a five-year term;

• Entering into a new $50 million second-lien term loan facility with a 5.5-year term. ASOF has agreed to fund this facility in full at the request of Alion in order to facilitate the implementation of the new first-lien term facility; and

• Redeeming and/or purchasing under a tender offer all of the company's existing 12% senior secured notes due 2014.

Other amendments

In addition to the changes described above, the amendment to the refinancing support agreement made the following changes:

• Interest on the new second-lien term loan will be modified to include an additional 2.5% PIK interest per year.

As a result, the interest rate for the first two years will be Libor plus the applicable margin payable under the first-lien term loan plus an additional 550 basis points per year (one-third of the preceding amount which will be paid in cash and two-thirds will be paid in kind) plus the additional 2.5% PIK interest referenced above.

For the remaining life of the loan, the interest the interest rate will be Libor plus the applicable margin payable under the first-lien term loan plus an additional 300 bps per year plus the additional 2.5% PIK interest;

• In exchange for ASOF extending its commitment to extend the new-second lien term loan, the company will pay ASOF an extension fee equal to $1 million on each of May 2, June 1 and July1;

• The company's Designation Certificate will provide that the series A holder, upon direction from the holders of the warrants, will have the option after April 30, 2015 to instruct the company to engage in a process to sell the company's equity or all or substantially all of its assets;

• The consent of the supporting noteholders will be required for any borrowing under the new revolving facility to the extent that, after giving effect to such borrowing, the aggregate amount of borrowings outstanding under the new revolver would exceed an amount equal to the difference between $65 million and the lesser of the amount of prepayments of the new first-lien term loan made prior to the date of such borrowing and $20 million; and

• The first-lien term loan will contain an excess cash flow sweep.

Alion, a research and development company whose primary customer is the U.S. government, is based in McLean, Va.

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